Crowdfunding

Fraud and Failure: Why the Crowd Can be Smart

Ethan Mollick, Associate Professor of Management

Fraud is Low – Why?

• Failure rates on Kickstarter are low, ~10%

Failure Rate by Amount Pledged

15%

Percent of Projects Failing

10%

5%

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How do crowds do in filling the job of experts? (with Ramana Nanda, HBS)

Experts: Kickstarter Backers:

• 30 professionals who judge theater • 120 Kickstarter projects in theater
grants for the NEA and other (30 failures, 30 partial failures, 30
national competitions successes, 30 large successes)
• Answered questions derived from • Surveyed the projects as well to get
NEA criteria about the audience, outcomes
artistic merit, and feasibility of
project pitches
• Judged Kickstarter theater projects
selected using stratified sampling
The Crowd and Experts Seem to Agree

• Crowd and Experts agree around

.5
60% of the time, with more

.4
successful projects getting more
agreement

.3
Density
.2
.1
0
1 2 3 4 5
Average score assigned by judges

Did not meet funding goal on Kickstarter

Met or exceeded funding goal on Kickstarter
kernel = epanechnikov, bandwidth = 0.3512
The Crowd and Experts Seem to Agree

• Crowd and Experts agree around

.5
60% of the time, with more

.4
successful projects getting more
agreement

.3
Density
.2
• 75% of the time where there is a
disagreement, it is the crowd

.1
funding something the experts

0
1 2 3 4 5
didn’t Average score assigned by judges

Did not meet funding goal on Kickstarter

Met or exceeded funding goal on Kickstarter
kernel = epanechnikov, bandwidth = 0.3512
What Happens in the Long Term

EXPERTS & CROWD CROWD ONLY

Failure
Commercial
Hit
Artistic
Hit

Commerci
al Hit

Success Success
Linus’s Law at Work

• “With enough eyes, all bugs are shallow.”

• Lots of people means fraud is easy to spot
• Successful projects attract more people
The Crowd is Surprisingly Smart

• The crowd uses rational criteria to decide when to back projects

• The crowd allows higher variance projects to succeed
• Fraud is low BUT the protections against fraud can break down if:
• There are not enough eyeballs
• There is not enough diversity
• Platforms are not willing to act on signals
Crowdfunding
Who Succeeds at Crowdfunding?

Ethan Mollick, Associate Professor of Management

Who Succeeds at Crowdfunding?

• Who you are is less important in crowdfunding

• When activism works
Profile of a Crowdfunder
Kickstarter Overall
Age 39, 50% married, 17% minority
Employment Status Proportion
Unemployed 4%
Employed Full-Time 39%
Independent/Freelance 19%
Entrepreneur 12%
Other self-employed 14%
Student 10%

Source: Survey conducted Nov. 24-Dec. 21, 2015. “Shared, Collaborative

and On Demand: The New Digital Economy” Pew Research Center
Crowdfunding and Under-represented Groups

• For people who are funded, equally likely to succeed

• Regardless of gender, education, partners, teams, children, race
• What about getting funding?
• Background: women are disadvantaged in every form of fundraising
(35% of business owners, 2-6% of VC recipients)
• But they do better in crowdfunding, why?
 80%

Percent of projects successful

70%

60%

50%

Female no male
40%
Male no female
30%

20%

10%

0%

Fashion Publishing Film Tech Games

% Female
57% 54% 46% 22% 21%
Backers
 80%

Percent of projects successful

70%

60%

50%

Female no male
40%
Male no female
30%

20%

10%

0%

Fashion Publishing Film Tech Games

% Female
57% 54% 46% 22% 21%
Backers
 Female Backers Supporting a Project

3.91 3.92

3.46 3.46

Male (pic), not activist Male (pic), activist Female (pic), not activist Female (pic), activist
Recap

• Crowdfunding increases opportunity

• You can be anyone from anywhere
• Activism, helping people who are disadvantaged
Crowdfunding
Crowdfunding for Startups

Ethan Mollick, Associate Professor of Management

Crowdfunding for Startups

• Common way to launch or sustain a startup

• Can work to raise additional money
• Protect your idea
Lots of Startup Activity, in Particular Categories
What kind of organization created the project?
100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Product-oriented categories Art-oriented categories

One time project, no organization New organization established for project Pre-existing organization
Many Projects Generate Revenue

Average Yearly Revenues (Outside of Kickstarter Campaign Money)

for Projects that Earned Any Income
Standard errors in parentheses
Product Artistic
No organization $38,271 (6882) $3,088 (572)
Ongoing pre-existing $104,020 (15246) $17,854 (3959)
Ongoing new for-profit $121,739 (24144) $35,760 (15178)
Ongoing new non-profit $34,949 (16730 ) $71,069 (41928)
Factors That Predicted Raising VC/Angel

• Successful projects with high goals (raising more than you asked was not
important)
• Innovative projects
• Actively tried to raise VC/Angel before your campaign
• Effort that went into preparation
• Generally technology or design projects
 Proportion Using

0 .1 .2 .3 .4 .5

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